In a climate where Weinstein clauses are shaping M&A and the latest Kevin Spacey feature nets less than $1,000 on opening weekend, many shareholders and activists were puzzled by the persistence of Leslie Moonves. CBS’s former president, CEO and chairman held onto his position for over six weeks despite a New Yorker article outlining accusations of sexual misconduct from half a dozen women.
The accusations stacked on to the pressures of CBS’s roiling, board-driven litigation with its controlling shareholders, the Redstone family and their holding company National Amusements. Rumors of negotiations and a potential exit trickled out as the public became further incensed at reports that Moonves could be paid hundreds of millions for leaving despite the salacious circumstances surrounding his impending ouster. Monday brought a tipping point for both conflicts. Just as six additional women stepped forward to round out a dozen allegations of misconduct, CBS announced that Mr. Moonves had finally stepped down and $20 million would be paid to #metoo related organization; and, the battle between CBS and the Redstones came to a settlement.
Why now? (Why not weeks ago?)
In contrast to the swift removal of executives at several other major corporations on the heels of similar allegations, many questioned CBS’s apparent lethargy amid whispers of possible severance payments. Mr. Moonves’s contract did not include exceptional provisions that have driven negative severance situations at other firms, but as with the departure of Steve Wynn from the eponymous resort firm, the sheer size of the payments could have driven damaging delays and forced the board to negotiate.
However, the contemporaneous developments around the intercompany litigation and the CEO transition offers another explanation: rather than sloth on part of the board, the delay to Mr. Moonves’s departure may have reflected a desire for a neat resolution to several issues at once. While the former CEO was not the most vocal opponent of the Redstones’ plans and was not named as a plaintiff in the suit, he was integrally linked to the efforts to keep CBS a separate entity. Rather than draw out the resolution of the conflict and keep headlines in the papers, the board chose to rip off the bandage.
Seeking Certainty
While the timing of departure is now set, the cost remains to be determined. Mr. Moonves was previously one of the most highly compensated public executives in the US, if not the world, and his employment agreement provided for substantial and stringent severance terms. As of year-end, his total estimated severance package for termination “without cause” was pegged at over $117 million in cash plus vesting of over $64 million in stock; in addition, CBS could ultimately be on the hook for Mr. Moonves’s legal expenses in an investigation or subsequent arbitration. For scale, CBS had around $252 million in cash on hand at June 30, 2018.
The nine-figure separation benefits are a far cry from the $0 send-off that many activists have supported, which also reflects the total that would be paid if he were terminated for “cause.” The split between such a clear-cut firing and the more nebulous “without cause” separation is common for US executives, and this instance was not uniquely structured. The triggers constituting “cause” included eight conditions such as material fraud or a violation of the sexual harassment policy, all of which are common categories among public companies.
Monday’s separation agreement split some of the difference between the two scenarios and plainly lays out a “bona fide” dispute about his severance rights. The settlement fixes the potential separation payment at $120 million cash with no equity acceleration, likely reflecting a compromise in the total package that would avoid incrementally increasing in his equity stake as the company cut ties. However, the check is not in the proverbial mail – if the investigation (and all-but-inevitable subsequent arbitration) support a termination for cause, the money will be returned to the company. If CBS is ultimately not able to terminate him for cause, the princely sum is released to Mr. Moonves. The settlement also keeps his entitlement to advancement of attorney’s fees and stipulates that he will provide advisory services for up to a year for no compensation beyond office services and security. Interestingly, the vaunted $20 million payout to #MeToo-related charities is to be made by CBS, and the as-yet-unnamed charities are to be cosigned by Mr. Moonves.
The Cost of Confidentiality
The separation agreement is a multimillion concession from Mr. Moonves against an excessive contract, but still unlikely to placate CBS’s critics or even shareholders. The board’s caution, however, may have been choosing the frying pan over the fire. A more direct approach could have started an uglier fight, as played out last month at Barnes & Nobles – or rather in a courthouse, after the beleaguered bookseller’s former CEO, Demos Parneros, filed suit in search of restitution. Parneros was terminated for “cause”, with the board citing violations of company policy “not due to any disagreement with the Company regarding its financial reporting, polices or practices or any potential fraud.” Compared with his employment agreement, this cryptic assurance left a less-than-rosy list of misconduct, negligence, and substance abuse as possible triggers for the firing. Media reports focused on (or at least postulated) sexual harassment as a driving factor, in turn undergirding Parneros’ legal action.
While the suit’s demand for $4 million cash plus equity pales in comparison to Moonves’s potential entitlement, the cost of airing the company’s dirty laundry may end up exceeding any financial penalties imposed by the court. Parneros’s 19-page filing was much less cryptic than the company’s firing announcement, with thinly veiled references to failed merger talks and clear personal attacks. It repeatedly cited the firm’s largest shareholder and former CEO, Leonard Riggio, as a source of instability and painted him as a boorish bully to current employees.
It’s a situation that any board would want to avoid, and indeed many US executive severance provisions come complete with a litany of non-disparagement and non-disclosure arrangements. Mr. Moonves’s aforementioned contract demanded particular confidentiality, including painstakingly drafted prohibitions around interviews or books and any derogatory statements about CBS. Mr. Parneros’s agreement included some similar covenants, but without any severance paid or equity left to vest, the restrictions were left largely toothless.
Of course, a turnaround CEO with one year’s tenure is not in the same position as an industry mogul who had shepherded a firm for over 20 years; a struggling retailer is not in the same position as a growing media giant. Adding fuel to the fire, the perennial public fascination with Hollywood intrigue and the premium on a firm’s reputation in the industry could have pushed CBS’s board from decisive action towards grudging compromise even without a clean exit. The separation agreement emphasized confidentiality to the maximum extent legally allowable and maintained many of the restrictive covenants in his employment agreement. Meanwhile the concurrent litigation had separately put the Redstone family in a rare spotlight while airing out many previously confidential details of National Amusements’ interest in CBS. For the reputation of the firm and all the individuals involved, an investigation behind closed doors and a relatively tidier transition may have seemed well worth the price tag.
Coming Up Next….
At this point, shareholders and activists may have to content themselves with Mr. Moonves’s exit and trust in the rigor of the investigation. A nine-figure sum hanging on a final report and the possibility of arbitration is an uncomfortable position even for a company of CBS’s size. The settlement agreement also leaves CBS’s future uncertain, with the long touted Viacom-recombination plans on pause and a window open for alternative strategies (or strategic partners).
The transition and the CEO search will test both the firm’s succession planning and the reconstituted board’s effectiveness. Shareholders would do well to review the terms of any successor’s contract, and to keep an eye on how the board addresses COO-come-interim-CEO Joseph Ianniello. Thanks to a key man clause, Mr. Ianniello could resign with full benefits if someone other than himself or Mr. Moonves was named CEO of CBS. This arrangement leaves the refreshed board saddled with choosing between the succession planning decisions of their predecessors or cutting more checks and stomaching more uncertainty in the search.
More broadly, shareholders should be mindful of how firms respond to the raised stakes around executive conduct and company culture. For any company, the situation is a reminder that skeletons can lurk deep in closets and can be shaken out in the least opportune circumstances, with or without a Weinstein clause.
Maria Vu contributed to this report. Julian and Maria cover executive compensation in the U.S. market.